Chris Edwards ’21, Director of Tax Policy Studies and Editor, DownsizingGovernment.org, “The Triumph of Biotechnology and Private Capital”, CATO, 9/24/21, https://www.cato.org/commentary/triumph-biotechnology-private-capital
People often claim that capitalism focuses only on short-term profits. But the venture capitalists and angel investors who fund firms such as Moderna and BioNTech are hugely patient, and they lose money on most of their investments. Typically, their model rests on the calculation that a small percentage of their investments will generate a sufficiently high return on going public or being sold to both “pay” for those that — as will often be the case in a very tricky sector — lose money (or make very little) and make the sort of good money that they and their clients are expecting when putting together an investment portfolio.
In biotechnology and other leading-edge industries, after-tax investor gains are often reinvested in the next round of risky startups, thus creating a virtuous cycle. If the government had taxed away the Struengmanns’ capital gains from selling Hexal, they might not have had the cash or incentive to invest in BioNTech. One of the reason that nearly all high-income countries keep capital-gains taxes low is to help ensure that investors and entrepreneurs are incentivized to take the risk of committing time and resources to ventures that can offer no promise of a good return, the sort of ventures, in other words, so typical of ventures relying on scientific and technical innovation. Those who take high risks should be rewarded, if that risk works out, with high rewards.
Unfortunately, that logic eludes President Biden and congressional Democrats. They not only would like to raise capital-gains-tax rates, but some of them would also like to broaden the capital-gains-tax base, including by taxing gains before they are realized. If applied to startup investing, that could do terrible damage to the ability of early stage companies to secure the patient capital that they need. Punishing capital gains makes no sense if we want investors and entrepreneurs to pursue valuable but risky growth opportunities.
Some cynics are griping about the big profits that Moderna and BioNTech are now making, but investors in those firms absorbed losses for a decade. Besides, there is no better place for profits to flow right now than to biotech firms and their research. BioNTech announced that it will build on its mRNA advances to develop shots against malaria and tuberculosis, which together kill more than a million people a year. And numerous biotech firms are now aiming to create more effective influenza vaccines based on mRNA technologies.
One of the key moments in the development of the biotech sector as we know it today was the launch of Genentech in 1976, backed by venture-capital firm Kleiner Perkins. The success of that pioneering firm “gave credence to the view that scientific research, infused with start-up firm spunk, could be a critical component of economic growth,” noted a history of the industry by Walter Powell and Kurt Sandholtz.
To undermine an approach that has worked so well, and delivered so much, by raising capital gains makes no economic sense. Worse still, as we consider the lives saved or improved by companies in biotechnology and other innovative sectors, companies that relied on private risk capital, it may well come at considerable human cost, too.